report to the honorable eugene scalia, united states ... · benefit plans. this report examines...

Advisory Council on Employee Welfare and Pension Benefit Plans

Report to the Honorable Eugene Scalia, United States Secretary of Labor

Voluntary Transfers of Uncashed Checks from ERISA Plans to

State Unclaimed Property Programs

November 2019

ERISA Advisory Council November 2019

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NOTICE

This report was produced by the Advisory Council on Employee Welfare and Pension Benefit

Plans, usually referred to as the ERISA Advisory Council (the “Council”). The Council was

established under section 512 of the Employee Retirement Income Security Act of 1974, as

amended (“ERISA”) to advise the Secretary of Labor on matters related to welfare and pension

benefit plans. This report examines issues arising from voluntary transfers of uncashed

distribution checks by pension plans subject to ERISA to state unclaimed property programs.

The contents of this report do not represent the position of the Department of Labor (the

“Department”).

LIST OF COUNCIL MEMBERS

Srinivas D. Reddy, Council Chair

David J. Kritz, Council Vice Chair

Jason K. Bortz, Issue Chair

Linda M. Kerschner, Issue Vice Chair

David M. Blanchett, Drafting Team Member

Glenn E. Butash, Drafting Team Member

Tearyn J. Loving, Drafting Team Member

Colleen E. Medill, Drafting Team Member

Andrea T. Sellars, Drafting Team Member

Julie A. Curtis

Douglas L. Greenfield

William B. Johnsen

Robert A. Lavenberg

Bridget O'Connor

Marcy L. Supovitz


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ABSTRACT

The 2019 ERISA Advisory Council explored whether there are circumstances under which a

defined benefit or defined contribution pension plan might consider voluntary transfers of

uncashed distribution checks to a state unclaimed property program in order to advance the goal

of reuniting participants and beneficiaries who cannot be found or who are nonresponsive

(“Missing Participants”) with their retirement savings.1 The 2019 Council did not include

welfare plans within the scope of its work, as many welfare benefit plans are insured or self-

funded from operating cash of the plan sponsor, which, the Council believed, would have raised

additional issues. The 2019 Council also purposefully did not address what steps are necessary

or appropriate to locate Missing Participants, which was the subject of a 2013 Council report and

is currently the subject of much public policy debate. Finally, the 2019 Council assumed that,

consistent with prior Department of Labor guidance, state unclaimed property laws that purport

to require transfers of uncashed retirement checks to state unclaimed property programs are

preempted by ERISA. Therefore, the focus of the Council was to gain an understanding of the

nature and operation of state unclaimed property programs and to evaluate the extent to which

they might advance the goal of reuniting Missing Participants with their retirement savings and

whether there are circumstances under which a plan fiduciary might voluntarily transfer

uncashed checks to a state unclaimed property program.

1 The Council’s issue statement uses the terms “permissive transfer” and “state unclaimed property fund.” This Report uses the terms “voluntary transfer” and “state unclaimed property program,” which are more commonly used and descriptive.


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ACKNOWLEDGEMENTS

The Council recognizes the following individuals and organizations who contributed to the

Council’s deliberations and final report. Notwithstanding their contributions, any errors in the

report rest with the Council alone.

Meghan Aguirre Nebraska State Treasurer’s Office

William Berger Keane Unclaimed Property Services

Jennifer Borden Holders Coalition and Unclaimed Property

Professionals Organization

Mark William Bracken Massachusetts State Treasury

Stephanie Cibinic Pension Benefit Guaranty Corporation

Kevin Clark Millennium Trust Company

Christine Donahue Employee Benefits Security Administration

Larry Good Employee Benefits Security Administration

Michael Hadley Davis & Harman LLP

Amy Hess University of Tennessee College of Law

M. Garrett Hohimer Alight Solutions

Jan Jacobson American Benefits Council

William Jeffries Empower Retirement

Dennis Johnston Utah Unclaimed Property Division

Lynden Lyman The Unclaimed Advisor

Allen Mayer Illinois State Treasurer

Thomas Norris Employee Benefits Security Administration

John Perugini Millennium Trust Company

Peter Preovolos PenChecks Trust

Spiro Preovolos PenChecks Trust

Aliya Robinson ERISA Industry Committee

George Sepsakos Groom Law Group

Jane Smith Pension Rights Center

Holly Tardif Alight Solutions

Kevin Walsh Groom Law Group

J. Spencer Williams Retirement Clearinghouse


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TABLE OF CONTENTS

I. RECOMMENDATIONS .................................................................................................... 7

II. PRIOR COUNCIL REPORTS ........................................................................................... 8

III. BACKGROUND ................................................................................................................ 9

1. The Missing Participant Problem............................................................................ 9

2. The Uncashed Check Problem .............................................................................. 11

3. The Absence of National or Federal Solutions ..................................................... 13

IV. COMMON APPROACHES TO UNCASHED CHECKS ............................................... 13

1. Involuntary Rollovers or Transfers to Taxable Accounts ..................................... 15

2. Forfeiture-and-Reinstatement ............................................................................... 16

V. STATE UNCLAIMED PROPERTY PROGRAMS ......................................................... 17

1. Overview ............................................................................................................... 17

2. Reasons for Low ERISA Plan Utilization ............................................................ 20

VI. WITNESS TESTIMONY ................................................................................................. 22

1. Academics ............................................................................................................. 22

2. State Representatives ............................................................................................ 23

3. Employers ............................................................................................................. 28

4. Consumer Representatives .................................................................................... 29

5. Unclaimed Property Professionals ........................................................................ 30

6. Recordkeepers ....................................................................................................... 33

7. Auto-IRA Providers .............................................................................................. 33

8. Representative of the PBGC ................................................................................. 35

VII. COUNCIL OBSERVATIONS ......................................................................................... 36

1. Tax Considerations ................................................................................................36

2. Likelihood of Reuniting Missing Participants with Lost Retirement Savings .................................................................................................................. 38


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3. Operational Complexity with Transfers to State Unclaimed Property Programs ............................................................................................................... 39

4. Differences Among States .................................................................................... 41

5. Potential Backlog of Uncashed Checks ................................................................ 44

VIII. REASONS FOR RECOMMENDATIONS ...................................................................... 44

1. Uncashed Checks as Plan Assets .......................................................................... 44

2. Remittance of Uncashed Checks to a State as a Distribution of Benefits ............ 46

3. Voluntary Transfers as Consistent with ERISA Fiduciary Duties........................ 47

4. Safe Harbor ........................................................................................................... 48


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I. RECOMMENDATIONS

Based on the testimony received and for the reasons stated, the Council recommends that the

Department publish the following:

1. Guidance (i) clarifying that uncashed distribution checks are assets of the plan within the

meaning of section 3(42) of ERISA2 and (ii) reaffirming that ERISA preempts state

unclaimed property laws with respect to such assets;

2. Guidance stating that a transfer of amounts attributable to a Missing Participant’s

uncashed check to a state unclaimed property program constitutes a payment of benefits

under ERISA; and

3. Guidance stating that (i) a plan fiduciary will be viewed as having satisfied its fiduciary

responsibility to the extent the fiduciary transfers amounts attributable to a Missing

Participant’s uncashed check to a state unclaimed property program that meets minimum

standards, as defined by the Department and informed by the discussion below, including

allowing claims in perpetuity, and (ii) in connection with any such transfer, a plan

fiduciary may rely on a state program’s representation that it meets such minimum

standards.

The Council is of the view that guidance addressing voluntary transfers to state unclaimed

property programs should not be in derogation of other available options for addressing uncashed

checks, such as involuntary rollovers or transfers to taxable accounts, or forfeiture-and-

restoration as provided under current Treasury regulations. Similarly, the Council recommends

that the guidance should confirm that it is up to the plan to decide the extent to which it engages

in any voluntary transfers to state programs. This includes a plan’s ability to choose, for

example, to transfer uncashed checks only below a certain value (e.g., $100) or only of a certain

type (e.g., required minimum distributions) to state unclaimed property programs while utilizing

other options for larger uncashed checks or other types of payments. Similarly, consistent with a

2 We did not hear testimony on and are not addressing whether the plan’s asset is the contractual right to repayment, the underlying dollars held in a plan disbursement account or some other property right.


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voluntary approach, a plan could choose to transfer uncashed checks only for participants or

beneficiaries resident in certain states.

The Council also notes that these recommendations are based on current law and the absence of a

federal registry or “clearinghouse” for reporting or handling uncashed retirement checks. As

discussed below, several countries maintain either a national clearinghouse or a registry and the

Council is aware of legislative proposals for the creation of something along these lines in the

United States. Some witnesses suggested that the Pension Benefit Guaranty Corporation (the

“PBGC”) could serve such a role; however, it is the Council’s understanding that the PBGC is of

the view that it does not currently have statutory authority for such a role and, in any event, this

issue is outside the Council’s mandate. Some members of the Council, however, believe that a

federal approach to uncashed checks would be preferable to the voluntary state-by-state approach

outlined by the Council in this report.

II. PRIOR COUNCIL REPORTS

The Council’s report builds on prior reports by the Council. In 2013, the Department asked the

Council to examine methods of maintaining contact with participants, so they do not become

Missing Participants, and methods of finding participants once they become Missing

Participants. The Council issued a report based on the testimony of plan sponsors, retiree

advocacy groups, service providers, accountants, policy organizations, and related trade

associations, and representatives of governmental agencies, including the Department, the Social

Security Administration (“SSA”) and the PBGC.3 The Council recommended that the

Department develop a standard of best practices, provide additional legal guidance, and

coordinate with other government agencies. In the 2013 report, the Council recommended

specifically that the Department issue updated guidance on ERISA preemption of state

abandoned property laws with respect to Missing Participants and guidance clarifying the status

of assets used to satisfy benefit payment obligations while a benefit check remains uncashed.

3 Locating Missing and Lost Participants, Advisory Council on Employee Welfare and Pension Benefit Plans Report: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2013-locating-missing-and-lost-participants.pdf.

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2013-locating-missing-and-lost-participants.pdf

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2013-locating-missing-and-lost-participants.pdf


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III. BACKGROUND

The Department asked the 2019 Council to explore whether there are circumstances in which a

plan fiduciary may, consistent with its fiduciary obligations, elect voluntarily to transfer amounts

to a state unclaimed property program owed to a participant or beneficiary who cannot be

reasonably located by the plan and for whom the plan has abandoned location efforts.4

The Council has narrowed its focus on Missing Participants and state unclaimed property

programs in two respects. First, the Council is only addressing uncashed distribution checks.

Unlike unpaid benefits, plans ordinarily subject distribution checks to income tax withholding

and reporting. Thus, as discussed in more detail below, the issue of uncashed distribution checks

generally does not implicate a comparison of taxable and non-taxable options, which introduces

a material degree of complexity. Also, the Council was not prepared to address issues of

valuation of unpaid accrued benefits in defined benefit plans. Second, the Council is only

addressing defined contribution and defined benefit retirement plans. We are not considering

health and welfare plans, which may present different plan-asset, state-regulatory and ERISA-

fiduciary considerations.

1. The Missing Participant Problem

According to the U.S. Bureau of Labor Statistics (BLS), “[t]he median number of years that

wage and salary workers had been with their current employer was 4.2 years in January 2018.”

A subsequent BLS news release dated August 22, 2019 noted, “Individuals born in the latter

years of the baby boom (1957-64) held an average of 12.3 jobs from ages 18 to 52.”5

4 In January 2019, GAO issued a report addressing tax and ERISA issues associated with unclaimed savings in individual retirement accounts (“IRAs”) and defined contribution plans. The report recommended that DOL specify the circumstances, if any, under which uncashed distribution checks from active retirement plans may be transferred to state unclaimed property programs. GAO Retirement Accounts: Federal Action Needed to Clarify Tax Treatment of Unclaimed 401(k) Plan Savings Transferred to States, GAO 19-88 at https://www.gao.gov/assets/700/696525.pdf. In a comment on the draft report, the Department stated that it plans “to continue to evaluate whether there are circumstances in which transfer of uncashed distribution checks from an ongoing plan to a state unclaimed property fund advances the goal of reuniting missing participants with their retirement savings.” GAO 19-88 at 51. This Report is intended to help in that continuing evaluation.

5 Number of Jobs, Labor Market Experience, and Earnings Growth: Results From A National Longitudinal Survey, at https://www.bls.gov/news.release/nlsoy.nr0.htm.

https://www.gao.gov/assets/700/696525.pdf

https://www.bls.gov/news.release/nlsoy.nr0.htm


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One of the likely consequences of these job transitions is that the worker participates and accrues

benefits in multiple employer-sponsored retirement plans. Over time, the worker could lose

contact with those plans. That lost contact may hinder the distribution of the worker’s accrued

benefits for multiple reasons, such as: (1) the worker might forget – to the extent that he or she

ever understood that he or she had accrued a benefit payable from a retirement plan, (2) the

worker might forget the name of the retirement plan that owes the benefits, (3) the name of the

prior employer or the retirement plan itself might change and the worker might not know about

the change, (4) the worker might not know or have the resources to contact the retirement plan,

or (5) the worker might decide that the benefit accrued under the retirement plan is too small to

warrant the effort needed to receive the benefit.

There is no guidance directly addressing the obligations of fiduciaries to locate missing or

unresponsive participants in ongoing retirement plans. However, the Department of Labor has

issued guidance addressing Missing Participants in terminated plans. Field Assistance Bulletin

2014-01 provides that “[c]onsistent with their obligations of prudence and loyalty, plan

fiduciaries must make reasonable efforts to locate Missing Participants or beneficiaries . . .

However, after a plan fiduciary reasonably determines . . . that a participant or beneficiary cannot

be located, the fiduciary may distribute the Missing Participant’s or beneficiary’s benefits” to an

IRA, taxable account or a state unclaimed property program, among other options.6

The Field Assistance Bulletin suggests a number of search steps that a prudent fiduciary should

always take before abandoning efforts to find a Missing Participant, regardless of the size of the

participant’s account balance because such efforts involve so little cost and such a high chance of

success. However, other more expensive approaches may be required where account balances

are larger. Thus, for example, a plan fiduciary should ordinarily use search options like certified

mail, checking plan and employer records, running free electronic search tools, and reaching out

to plan beneficiaries. Additional search steps like the use of “Internet search tools, commercial

locator services, credit reporting agencies, information brokers, investigation databases and

analogous services that may involve charges” may be appropriate, depending on costs. Thus, the

6 Field Assistance Bulletin 2014-01 (August 14, 2014).


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Field Assistance Bulletin appropriately reflects a balancing of cost and probability of success,

reflecting that the cost to the plan may not be justified by the probability of success.7

2. The Uncashed Check Problem

A plan most commonly discovers that it has Missing Participants when a distribution check goes

uncashed. Uncashed checks may arise for any number of reasons, including because:8

• the check is issued to the worker at an address that is no longer valid;

• the worker chooses not to cash the check either because of a concern that such action

would render the worker ineligible for government or other types of financial assistance

or in the belief that a delay in cashing the check will delay recognition in income for

income-tax purposes;

• the worker chooses not to deposit the check because the dollar amount of the check is so

small;

• the worker chooses to delay deposit of checks until several are issued as a way to

accumulate a “savings” balance.

The Council believes that uncashed checks are most commonly related to situations when the

participant has not actively requested a distribution. These situations include distributions

related to things like required minimum distribution (“RMD”) payments, cash-outs if the

employee terminates with a vested balance of $1,000 or less, a refund of loan repayments that

were made after the loan has been paid off, company matching contributions after the account

has been fully distributed, cash dividends for plans with company stock, and trailing dividends

received after the full distribution. The dollars at the individual participant-level tend to be

7 Presumably this guidance reflects the standards generally applicable to fiduciaries in active plans as well as terminated plans, although the Council heard testimony from plan sponsors that there is a need for the Department to issue guidance on the appropriate fiduciary steps for locating Missing Participants in an active plan. Notwithstanding this testimony, the Department specifically asked the Council not to address the issue of fiduciary obligations to locate Missing Participants in active plans. We understand, however, that the Department is aware of this perspective and did not believe that recommendations from the Council would be productive.

8 Several witnesses encouraged the Department to consider endorsing technologies, such as ACH and wire transfers, that would reduce the number of uncashed checks overall.

.


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relatively small, with the SPARK Institute, a trade association of recordkeepers, reporting that

based on a survey of its members:

• 78% of uncashed distribution checks in defined contribution plans are for less than $100;

• 98% of checks are for less than $1,000; and

• 0.2% were for an amount greater than $20,000.

Notwithstanding the small dollars typically involved in an uncashed distribution check payable

to a Missing Participant, the aggregate dollars associated with such checks appear to be material.

With over 700,000 private retirement plans, covering over 136 million participants and $8.6

trillion in assets as of 2016, these small amounts add up.9 The testimony suggested that, in the

year 2017, roughly 4.5% of all checks go uncashed. Roughly 5 million checks were issued from

defined contribution plans, which would suggest that 225,000 checks may have gone uncashed in

defined contribution plans alone. Based on the experience of Council members, and testimony

and conversations with recordkeepers, the value of uncashed retirement plan checks likely

exceeds $100 million per year but could be considerably larger. This suggests that the total

value of uncashed retirement plan checks could easily exceed $500 million cumulatively.

Even though the dollars involved for any given participant or beneficiary may be modest, the

Council recognizes that these monies still have the potential to make a meaningful difference in

the financial security for many Americans. For this reason, the Council believes that the primary

consideration in addressing uncashed distribution checks is to reunite Missing Participants with

their savings the most effective way possible. However, this objective needs to be balanced in

light of the costs to the plan and the likelihood of reuniting Missing Participants with their

retirement savings.

9 See EBSA, Private Pension Plan Bulletin Historical Tables and Graphs 1975-2016 (December 2018) at https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.

https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf

https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf


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3. The Absence of National or Federal Solutions

Many countries maintain central repositories or clearinghouses for Missing Participants and

uncashed benefits.10 However, in the United States, there is no institution or national database

that captures information about Missing Participants.11

There is a reporting regime for unpaid benefits. However, uncashed distribution checks appear

to fall through the cracks. Under the existing information reporting rules, plans file the Form

8955-SSA to report unpaid accrued vested benefits from a retirement plan that are owed to

participants who have separated from service. The reported information is shared with the Social

Security Administration and, upon application for Social Security benefits, a notice from the

Social Security Administration informs the participant that he or she might be entitled to vested

benefits from the plan. However, benefits that have been distributed from a plan are not reported

on the Form 8955-SSA. Thus, there is no reporting mechanism for amounts that have been paid

to an IRA in an involuntary distribution or distributed to a state unclaimed property program.

Moreover, it appears that once a check has been distributed and subjected to income tax it would

no longer be subject to reporting on Form 8955-SSA, even though the check has not been

cashed.

As a result, each plan must determine how to handle uncashed checks on its own without the

benefit of a centralized repository or an information reporting regime. It is, therefore, not

surprising that plans have developed a variety of methods to handle the issue.

IV. COMMON APPROACHES TO UNCASHED CHECKS

When a distribution check is issued to a participant, the plan withholds income tax and issues a

Form 1099-R, thereby reporting the distribution as taxable income. The assets of the plan

attributable to the check are typically transferred into a checking account. The checking account

10 See GAO Workplace Retirement Accounts: Better Guidance and Information Could Help Plan Participants at Home and Abroad Manage Their Retirement Savings, GAO 18-19 (2018) (Appendix III, summarizing the treatment of missing participants in five countries). 11 In June 2016, Senators Elizabeth Warren (D-Mass) and Steve Daines (R-MT) introduced the Retirement Savings Lost and Found Act, which would establish a clearinghouse to assist participants’ in locating lost or forgotten retirement savings accounts. S. 3078, 114th Cong. (2016); see also Retirement Savings Lost and Found Act, H.R. 5805, 114th Cong. (2016).


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may be an account dedicated to the plan or may be an omnibus account maintained on the books

of the plan’s trustee or recordkeeper. The check will typically become void after the passage of a

specified amount of time, for example, 120 days from issuance. If the check becomes void, the

plan may initiate steps to locate the participant and reissue the check. However, in

circumstances in which the plan fiduciary is unable to locate the participant after reasonable due

diligence, the plan is faced with a quandary – what should it do with the uncashed check?

The Council heard testimony that many plans take no action with respect to unpaid balances

sitting in the plan’s disbursement account after making an appropriate search for the missing or

unresponsive participants. As a result, checks may sit indefinitely in an uncashed or “voided”

state in the plan’s disbursement account. These uncashed checks sit in a legal limbo, neither part

of the plan’s assets, as reported on its financial statements, nor wholly outside of the plan

because the money is still in a plan-related account. The probability that such monies will be

reunited with affected participants depends upon the extent of the employer’s continuing search

efforts or the participant appearing and demanding payment.

Other plans take a more proactive approach with respect to amounts attributable to uncashed

distribution checks held in the plan’s benefit disbursement account. There are essentially two

approaches:

• transfer the uncashed check amount to an IRA or to a federally insured taxable individual

account in an involuntary transfer (“involuntary rollovers or transfers to taxable

accounts”), or

• forfeit the uncashed check amount to the plan with a right of restoration pursuant to

Treasury regulations (“forfeiture and reinstatement”).

We discuss each of these two approaches below, which along with “do nothing,” appear to cover

how the vast majority of ERISA-covered retirement plans address uncashed checks.


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1. Involuntary Rollovers or Transfers to Taxable Accounts

Under the Internal Revenue Code (“Code”) and ERISA, a plan generally may not distribute

benefits to a participant who has experienced a distributable event – termination of employment,

retirement, disability or death – without the participant’s affirmative consent. However, Code

section 411(a)(11)(A) provides an exception if the participant’s vested account balance (or, in the

case of a defined benefit plan, the present value of a participant’s nonforfeitable benefit) is

$5,000 or less.

If the participant’s vested account balance (or, in the case of a defined benefit plan, the present

value of a participant’s nonforfeitable benefit) exceeds $1,000 but is not more than $5,000, the

plan must roll the amount over to an “individual retirement plan” (that is, an IRA) absent

directions from the participant, and the plan may choose to roll over amounts that are less than or

equal to $1,000.12

ERISA includes a fiduciary safe harbor that treats a participant as electing to rollover a cash-out

of $5,000 or less if certain requirements are met.13

The primary requirements for the safe harbor protection are that:

• The funds must be invested in a product that meets the requirements for preservation of

principal and provide a reasonable rate of return, whether or not guaranteed, consistent

with liquidity (generally, a money market fund); and

• The fees and expenses for the IRA, including investment expenses, must not exceed the

fees and expenses charged by the provider for comparable rollover IRAs.

Once the IRA is established, the IRA owner may choose to keep the IRA with the IRA provider,

transfer the account to another IRA custodian, roll in the balance to an eligible employer-

sponsored benefit plan, or take a distribution.

Some plans and third-party service providers have applied the small-sum rollover rules to

uncashed checks of Missing Participants. Under this practice, the amount of an uncashed check

12 Code § 401(a)(31)(B). 13 ERISA § 404(a)(3); 29 C.F.R. § 2550.404a-2.


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is restored to the plan and then distributed into an IRA pursuant to the involuntary rollover rules.

In one variation, the rollover is treated as having after-tax employee contributions due to prior

taxation. In another, the plan restores previously withheld taxes and reverses prior tax reporting

of the amount of the uncashed check.

The Council also understands that other plans treat an uncashed distribution check as outside of

the plan and have such checks “transferred” to taxable savings accounts for the benefit of each

affected participant. These taxable accounts are generally maintained like involuntary rollover

IRAs with the balance invested in a capital preservation investment. The latter approach is in

fact a necessity for amounts that are not rollover-eligible, such as required minimum

distributions.

2. Forfeiture-and-Reinstatement

Many plans provide that if a participant or beneficiary cannot be located, the amount of the

benefit is forfeited, subject to restoration if the participant or beneficiary later returns to make a

claim for benefits. The amounts that are forfeited are used for the benefit of the plan, typically to

pay reasonable plan expenses but also to reduce employer contributions.

The IRS expressly recognizes forfeiture-and-reinstatement as an acceptable method for dealing

with Missing Participants for plan qualification purposes. Specifically, Treasury Regulation

§ 1.411(a)-4(b)(6) permits plan sponsors to forfeit amounts owed to Missing Participants into the

plan as long as the benefits are reinstated upon the participant’s return and claim for benefits.

Moreover, Treasury Regulations do not require the plan to credit the former employee’s account

with any subsequent gains or losses.14

14 See Treasury Regulation § 1.411(a)-7(d)(4)(v). Several witnesses testified that the Department’s regional offices have taken the position that forfeiture and reinstatement is impermissible, despite the fact that the methodology is specifically contemplated in Treasury regulations. In particular, witnesses described that the Department has asserted that it is a prohibited transaction for a plan to forfeit amounts previously owed to Missing Participants, presumably because forfeiture may confer a benefit on the employer. Although outside the scope of our report, the Council strongly recommends guidance clarifying the ongoing viability of forfeiture-and-reinstatement.


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The Council heard testimony from the American Benefits Council that, in a brief survey they

conducted of their members, nearly half (49%) used the forfeiture-and-reinstatement method.

The others used involuntary rollovers.

V. STATE UNCLAIMED PROPERTY PROGRAMS

1. Overview

The Department asked the Council to explore whether there are circumstances under which a

plan might instead of the above approaches consider voluntary transfers of uncashed distribution

checks owed to Missing Participants to a state unclaimed property program.

The purpose of state unclaimed property programs is to safeguard and return the property of

missing owners. Unclaimed property programs are created and operated pursuant to state

unclaimed property laws, which historically have been based on model acts promulgated by the

National Conference of Commissioners on Uniform State Laws (“Uniform Law Commission”).

Today virtually all states have adopted, in whole or in part, one of the Uniform Unclaimed

Property Acts issued by the Uniform Law Commission in 1954, 1966, 1981, 1995, or 2016, with

only a few states retaining any of the provisions from the 1954 or 1966 versions. Thus, although

there is variation among state laws, certain core principles and procedures have been codified

through adoption of the 1981, 1995, or 2016 model statutes and are followed by most state

unclaimed property program programs. These core principles and procedures are summarized

below.

The purpose of state unclaimed property laws is to require entities in possession of unclaimed

property (“holders”) to attempt to return lost assets to the rightful owners. If the holder is

unsuccessful at reuniting the asset with its missing owner, after a period of presumed

abandonment (set at three to five years, depending on state law), the holder must turn the asset

over to the state unclaimed property program. Under precedent established by the U.S. Supreme

Court in a series of cases involving the rights of states to assert jurisdiction over intangible

personal property, the Court adopted, as a matter “of ease of administration and of equity,” the

rule that the state of the last known address of the owner of the property, as shown on the records

of the property holder, has priority over other states to the property. If there is no address of


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record for the owner, the holder must report and turn over the unclaimed property to the state of

the holder’s domicile (e.g., for a corporation, the state of incorporation).15

Once the unclaimed property is remitted to the state, the state acts as a custodian of the asset. The

missing owner (or the owner’s heirs, successors, and assigns) recovers the property by submitting

a claim to the state’s unclaimed property program. Except in two states where property forfeits

after a period of time and cannot be claimed in the future by the owner, the rights of the owner to

recover the property are not forfeited or extinguished. The right of the owner (and, after his or her

demise, the right of his or her heirs) to recover the property remains in perpetuity.

Today, state unclaimed property programs maintain searchable web sites to publicize unclaimed

property and reunite missing owners with their assets. There is also a national web site,

MissingMoney.com, which facilitates aggregation of the state data and enables multistate searches

for unclaimed property. Currently 40 states, the District of Columbia, Puerto Rico, and Alberta,

Canada participate in the MissingMoney.com database, which enables a single multi-state search

for missing property. For states that do not participate in the national MissingMoney.com

database, the website provides a link to the state’s database. Missingmoney.com is a free service

to the members of the public who use it. Since its inception in 1999, the MissingMoney.com web

site has had 875 million searches that resulted in 22.5 million claims. The site currently has 130

million searchable properties listed online and averages over 83,000 searches each day.

State unclaimed property program programs have professional staff who search for owners using

informational databases such as Accurint and Clear Id. They also use news media and social

media to promote and drive traffic to MissingMoney.com or state websites, and set up booths at

state fairs, sporting events, and other public venues to help attendees find lost property. In

addition, the various state programs have developed state-specific methods designed effectively

to connect with their citizens. For example, Meaghan Aguirre, Director of Unclaimed Property

for the State of Nebraska, testified that her office publishes an annual “tabloid” newspaper with

the names of owners for unclaimed property reported during the year with a value of $25 or more

(increasing to $50 in 2020). This annual tabloid is published in all 16 of Nebraska’s daily

15 See Texas v. New Jersey, 379 U.S. 674, 683 (1965); Pennsylvania v. New York, 407 U.S. 206 (1972); and Delaware v. New York, 507 U.S.490 (1993).


19

newspapers. Dennis Johnston, the Deputy Treasurer and Unclaimed Property Administrator for

the State of Utah, testified that Utah experienced success with a social media campaign using

Facebook, Twitter, Instagram, and YouTube but had a dismal response to billboard ads. In

contrast, the State of Idaho, next door, had a very large positive response to billboards in the

northern panhandle region. Allen Mayer, Chief of Staff for the Illinois State Treasurer, testified

that some states stage live telethons, with professional staff taking telephone calls from

individuals. In Massachusetts, advertisements promoting the “find Mass Money” website are

broadcast daily during annual awareness campaigns on both AM and FM radio stations.

To submit a claim for property held in a state unclaimed property program, the owner either

downloads, completes, and submits a paper claim form or files an electronic claim form. Filing

an electronic claim form expedites the claim verification and documentation process. Many state

databases permit claimants to upload the documentation necessary to prove their claims rather

than mailing physical evidence, which increases the response and payment of claims. States also

have developed automated “fast track” software systems to process claims that meet certain

criteria and involve amounts under a specified dollar amount (e.g., under $1,000). Several of the

state witnesses explained how the electronic matching of unclaimed property owner records with

records held by other state offices, such as driver’s license bureaus and, more recently, state

income tax records, facilitates the return of lost property to its owner. More recently, several

states, led by Wisconsin, have developed automated systems to automatically issue payment of

unclaimed property under $2,000 if there is an owner match with a current state income tax

return.

State unclaimed property laws generally indemnify the holder of unclaimed property against

claims in connection with the transfer of property to a state unclaimed property program and

subsequent events, such as the failure to credit interest on amounts attributable to uncashed

checks.

The state unclaimed property laws of many states allow the programs to receive property that has

not yet reached the statutory period of dormancy. The state unclaimed property program also

can agree to modify the date on which a report is to be filed. Even where the state’s unclaimed

property statute does not provide express authority to accept property prior to the expiration of


20

the statutory abandonment period or to allow for the submission of a report other than on the

stated filing date, states may make such accommodations for so-called early or off-cycle

reporting on an administrative basis.

2. Reasons for Low ERISA Plan Utilization

i. Confusion about application of ERISA preemption

Plans may not be utilizing state unclaimed property programs for uncashed checks because of a

lack of awareness of the option. The Department has indicated that state unclaimed property

laws are preempted by ERISA.16 As a result, many employers may not have considered that it is

possible to transfer property voluntarily to a state unclaimed property program.17 Indeed, the

only reference to the possibility of a voluntary transfer to a state unclaimed property program is

in Field Assistance Bulletin 2014-01, which is a non-binding memo to the enforcement branch of

the Department and, as discussed in more detail below, treats involuntary rollovers to IRAs as a

preferred approach.

ii. Concerns about legality

One witness suggested that the voluntary payment of uncashed check amounts to states might

itself be viewed as a violation of ERISA’s statutory rules. In this regard, ERISA requires that

plan fiduciaries discharge their duties “for the exclusive purpose of … providing benefits to

participants and their beneficiaries … and … defraying reasonable expenses of administering the

plan ….”18 Distributing plan assets to a state unclaimed property program, even on the theory or

belief that the state might, eventually, be able to reunite the participant with his or her plan

benefit, is arguably inconsistent with this statutory command. In contrast, leaving the assets in

the plan (or, more specifically, returning the amount represented by the uncashed checks to the

plan’s trust) does not violate this principle and, to the extent those sums can then be used to

defray plan costs, is “more” consistent with ERISA § 404(a)(1)(A) than payment to the states.

16 ERISA § 514(a); Adv. Op. 94-41A (Tex.); Adv. Op. 79-30A (Calif.); Adv. Op. 78-32A (Ill.). 17 See also GAO 19-88 at 33-35. 18 ERISA § 404(a)(1)(A); 29 U.S.C. § 1104(a)(1)(A).


21

iii. Concerns about liability

Plans are also concerned that, if a participant later were to come forward and demand payment

from the plan with respect to amounts that the plan fiduciary had voluntarily reported and

remitted to the state, the plan would have an inadequate defense to an action brought under

ERISA § 502(a). The Council, however, also heard testimony that a plan would have a good

defense to the extent it engaged in a prudent process to locate the participant and only then

transferred assets to a state unclaimed property program.

iv. Perception of complexity

Witnesses also shared that most plans are reluctant to take on the administrative burden that

voluntary transfers to state unclaimed property programs could entail. In the first place, many

large employers (and even medium-sized employers) have plans with participants in all 50 states,

plus the District of Columbia, the Commonwealth of Puerto Rico, U.S. territories and

possessions, and even outside the United States (e.g., retirees living in Costa Rica).

The Council heard from state witnesses who explained that it is the law of the state in which the

beneficial owner of property was last located (as shown on the books and records of the property

holder) that controls. The resolution of this issue – favoring of the “owner” rather than the

“holder” – creates obvious compliance burdens for a multistate employer by setting up a

potential obligation to have familiarity with the laws of all 50 states, plus the District of

Columbia, Puerto Rico, and United States territories and possessions.

Although the Council heard from state witnesses who explained that there was some uniformity

in state laws, due to the adoption by the states of the Uniform Law Commission’s Uniform

Unclaimed Property Act, that uniformity is not absolute. In particular, states can and do have

different time periods following which property is deemed to have been “abandoned” for

purposes of triggering application of state unclaimed property law. Most states have either three

years or five years for triggering application of their unclaimed property law. State laws also

differ in the area of “statutory due diligence,” i.e., the specific efforts that states require holders

of property to undertake prior to reporting and remitting that property to the state. Witnesses

representing employers/plan sponsors indicated that they were reluctant to take on this


22

administrative burden voluntarily, particularly given that any added expense would likely

ultimately be borne by the plan participants themselves.

The issue of on-going benefit payments also raises administrative concerns for employers. For

example, if a participant is in payment status (e.g., receiving annuity payments from a defined

benefit plan or installment payments from a defined contribution plan) and then goes missing,

there is no mechanism, even under a voluntary process involving state unclaimed property

programs, to report and remit the entirety of the participant’s or beneficiary’s plan benefit, i.e.,

the amount of future checks that presumably would also go uncashed. Plans would thus be in the

position of reporting and remitting only a portion of the participant’s or beneficiary’s benefit that

is represented by uncashed checks, while retaining the remainder in the plan. A participant or

beneficiary who later comes forward to claim his or her past due benefits now must go to two

entities, the plan and the state, to receive the totality of his or her benefit, and the plan must keep

records, indefinitely, with regard to the portion remitted to the states and the portion still retained

by the plan. This process would repeat itself as additional checks went uncashed and were

turned over to the states. Many plan administrators and recordkeepers will stop cutting new

benefits checks for a participant or beneficiary, once they see that prior checks are going

uncashed, only resuming payment once it is confirmed that the checks will indeed be cashed.

v. Perception of state unclaimed property programs as benefitting states

Other perceived deficiencies in using state unclaimed property laws as a means of “reuniting”

participants with their retirement savings or aspects of their retirement savings include the

perception that unclaimed property programs are used to benefit the state.

VI. WITNESS TESTIMONY

1. Academics

The Council asked Amy Hess, the UTK Distinguished Service Professor Emeritus at the

University of Tennessee College of Law, to address two specific points. First, what is the

difference between property that escheats to a state and property that is held by a state under the

Uniform Unclaimed Property Act? Second, what are the common law duties of a trustee of a

private express trust when the trustee issues a check to a beneficiary of the trust in payment of a


23

distribution from the trust, but the check is never cashed and the trustee has tried unsuccessfully

to locate the beneficiary?

Professor Hess testified that for state unclaimed property programs operating under the Uniform

Unclaimed Property Act, assets transferred to the program are held in perpetual custodianship.

The property remains in custodianship in perpetuity so that the owner may come forward to

claim it at any time. In contrast, escheatment is a common law concept rooted in state laws of

intestate succession, which control the disposition of the assets of a decedent that are not

disposed of by a will or a will substitute, such as a beneficiary designation or a trust. Professor

Hess explained that, if no next of kin are alive to take the decedent’s property under the intestate

succession statute, then the decedent’s assets are transferred to (or technically, “escheated”) to

the state treasury and used for the benefit of the state. Thus, according to Professor Hess, it is

legally inaccurate to refer to a voluntary transfer of assets to a state unclaimed property program

as “escheatment” (meaning a forfeiture of the property to the state). Rather, the transfer of assets

to an unclaimed property program results in a perpetual custodianship for the benefit of the

missing owner.

Regarding the duties of common law trustees, Professor Hess explained that due to the

possibility of personal liability for a misdelivery of trust assets, trustees of private express trusts

proceed with caution when distributing trust assets. Professor Hess observed that, based on her

over forty-five years of experience with trust administration, common law trustees rarely had to

deal with large sums of uncashed beneficiary checks. Because of the rule imposing absolute

liability on a trustee who misdelivers trust assets, a trustee who knew of outstanding uncashed

distribution checks likely would request instructions from the court as to what to do with the

uncashed checks and would follow the court’s orders. Professor Hess stated that it is possible

private trustees believe that they should turn over uncashed checks to the state unclaimed

property custodian, perhaps even without a court order. She indicated that there is support for

this course of action in the scholarly literature.

2. State Representatives

A number of state unclaimed property professionals testified on behalf of the National

Association of Unclaimed Property Administrators (“NAUPA”). NAUPA’s membership is


24

comprised of representatives from the unclaimed property programs of all 50 states, the District

of Columbia, and the Commonwealth of Puerto Rico, as well as several foreign jurisdictions.

NAUPA’s perspective was that state unclaimed property programs are the best solutions to the

uncashed check problem as compared to the other options that are available to plans –

involuntary cash-out to an IRA or taxable account, or forfeiture-and-reinstatement – based on the

extent to which each option is effective in reuniting Missing Participants with their retirement

benefits.

In the view of the state unclaimed property representatives, state unclaimed property programs

are superior at reuniting participants with their retirement benefits. The representatives reported

they have access to a number of resources that IRA providers and plan administrators do not,

including, among others, earned and paid advertising, searchable individual state databases, a

national searchable website; many have on-line claims forms, dedicated program staff, and some

have access to other state records (such as state department of motor vehicle records and state

income tax records) to locate property owners.

The state representatives presented testimony regarding the extent to which state unclaimed

property programs have been successful in reuniting owners with their property. Based on a

survey covering the period from June 1, 2018 to May 31, 2019, NAUPA submitted testimony

suggesting that 14 states that participated in their survey have a return rate19 of 72% for in-state

property where a social security number is provided and where the value of the property is

greater than $100. They acknowledged that this ratio is only 41% for property with a value of

less than $100, which might be more representative of uncashed retirement checks, and that the

return rate is 20% when looked at through the lens of the number of properties with a value of

less than $100.

The states did not have direct evidence of return rates for uncashed checks attributable to missing

retirement plan participants. This reflects the very low level of usage by ERISA-covered plans

19 The return rate is the ratio of property returned to owners in a given period to the property taken in by the state unclaimed property program or programs during the same period. It is not a measure of the extent to which a particular item of property is returned to its owner. However, it is a proxy for the likelihood that property will be returned to an owner. The witnesses used a variety of terms for this ratio, including recovery ratio and success ratio. This report uses the term return rate.


25

but also the lack of separate recordkeeping for uncashed checks attributable to non-ERISA plans.

However, the states viewed the return rates for analogous property as the key metric. In this

regard, the states pointed to property governed by the Securities and Exchange Commission’s

lost property rules as highly probative because the holders of this type of property are subject to

extensive due diligence requirements that are comparable to the due diligence requirements

applicable to ERISA plans under Field Assistance Bulletin 2014-01. The SEC rules mandate

that holders of securities perform searches to locate missing owners prior to transfer to state

unclaimed property programs. These searches are comparable to the searches that plan

administrators generally conduct for missing plan participants and typically also include

utilization of credit bureau database aggregators.

NAUPA obtained data from 25 state unclaimed property programs that collectively represented

35 percent of the U.S. population. The analysis indicated that during the period June 1, 2018

through May 31, 2019, the states included in the data set received 343,423 securities-related

properties for which the holder was unable to locate the owner. During the same period, these

states returned 171,747 securities-related properties, for a return rate of 50 percent. The Council

determined that the fact that states are able to return fully one-half of the properties reported

where previously holders performed a robust search for the owners to be significant, given that

the holders of the securities, after conducting due diligence pursuant to federal law, had

experienced a zero percent return rate and thus remitted the securities to state unclaimed property

programs.

The state witnesses highlighted the absence of any return rate information with regard to

involuntary rollovers to IRAs, transfers to taxable accounts, or forfeiture-and-reinstatement,

inferring that the other available options for reuniting participants with their retirement savings

likely enjoy substantially lower success rates.

The states also rebutted concerns about the complexity of a state-by-state solution in at least two

ways. First, while acknowledging that no two state unclaimed property statutes are identical, the

states pointed out that certain core principles and procedures have been codified and are followed

by most states. In this regard, virtually all states have adopted, in whole or in part, one of the

Uniform Property Acts promulgated by the Uniform Law Commission in 1954, 1966, 1981, 1995


26

or 2016. Thus, all states have searchable databases and perform public outreach. Second, the

states argued that state unclaimed property programs provide a “one stop shop” through a national

searchable database for unclaimed property, MissingMoney.com.

The states addressed employer concerns about liability by pointing out that every state unclaimed

property program relieves the reporting entity of all liability from claims by an owner associated

with the property’s transfer to the state and a majority of states also provide reporting entities

with statutory indemnification or an alternative hold-harmless provision. Thus, plans would, for

the most part, be indemnified from claims that a participant was entitled to earnings on amounts

transferred to the states or that the plan acted imprudently in voluntarily transferring amounts

attributable to uncashed checks to the states. The indemnification provisions would not,

however, protect a plan from claims that it failed to take appropriate steps to locate a participant

or that the plan inappropriately benefitted from float while a check was outstanding.

The states acknowledged that all but four states do not credit interest on amounts attributable to

uncashed checks. But they pointed out that they do not charge for their services or the

processing of checks and that the potential earnings on typical uncashed check amounts are de

minimis. The states also pointed out that forfeiture-and-reinstatement does not provide for

earnings and that IRA providers that receive involuntary rollovers charge fees that effectively –

in their view – negate the potential earnings on such amounts. The 2014 GAO Report on Forced

Transfers and Inactive Accounts also found that fees outpaced returns in most of the IRAs they

analyzed and that the value of involuntary rollover IRAs tend to decrease over time.20

In response to suggestions that a federal repository or clearinghouse for uncashed retirement

checks might be a better solution, the state representatives argued that it makes more sense that

retirement benefits would be handled alongside other types of lost property than it would that

retirement benefits would be handled separately. They acknowledged the counterargument that

it is odd to shift from a federal retirement system to a state system but pointed out that these

nuances may be lost on Missing Participants. The state representatives also highlighted that

20 GAO, 401(k) Plans, Greater Protections Needed for Forced Transfers and Inactive Accounts, GAO-15-73 (2014) (recommending that DOL expand the default investment options available for small sum cash-outs beyond money market funds).


27

building an infrastructure at the federal level that is comparable to the infrastructure already in

place at the state level would be incredibly costly and duplicative.

With respect to concerns about the administrative or operational complexity associated with 50+

jurisdictions’ unclaimed property programs, particularly in light of the differences in state

abandonment periods, the state witnesses expressed a willingness to work with plans and their

service providers to accommodate off-cycle or early filings, i.e., filings that do not, strictly

speaking, meet each state’s abandonment period requirements. The state witnesses indicated that

the states commonly facilitate off-cycle and early filings provided that the holder has made a

good-faith effort to locate the owner of the property.

One issue the states highlighted is the problem of “old and cold” checks. The states

hypothesized that there are millions of dollars attributable to uncashed checks of Missing

Participants that are many years old. The states’ primary concern was that plans would feel

compelled to conduct costly searches for these Missing Participants with very little probability of

locating participants. This in turn they felt would serve as a significant deterrent from plans

electing to address the Missing Participant problem.

The state representatives recommended that the Department issue a number of clarifications, and

these recommendations are found in the NAUPA Witness statement. One noteworthy

recommendation is that the Department provide guidance defining minimum standards for state

unclaimed property funds to which plans may transfer uncashed distribution checks, specifically

the following standards:

i. Ability for the public to inquire by mail, telephone and online

ii. Free public website to conduct unclaimed property searches iii. Online submission of owner claims iv. Processing of claims without charge v. Claims allowed in perpetuity

vi. Data protection vii. Maintaining records in perpetuity

viii. Relieving transferring plan of liability ix. Reimbursement to transferring entity that pays a reappearing owner x. Following IRS reporting requirements


28

3. Employers

Kevin Walsh and George Sepsakos, principals at the Groom Law Group, provided written and

oral testimony to the Council based on their work with plan sponsors and plan service providers.

Their testimony emphasized the need for guidance from the Department on what plans should do

with uncashed checks and suggested that the guidance take the form of a safe harbor framework,

rather than simply result in an enforcement initiative. They reviewed the Department’s and

courts’ long-held position that state unclaimed property laws are preempted by ERISA and

offered alternatives to transferring distributions to state unclaimed property programs, including

mandating that plans (i) open an IRA using the stale checks for individuals, (ii) forfeit the

amount of the stale checks after a reasonable effort is made with the understanding that the check

would be reissued if the participant comes forward, or (iii) with appropriate legislative action,

transfer the stale check to a central repository.

Jan Jacobson, Senior Counsel of the American Benefits Council (“ABC”) and Aliya Robinson,

Senior Vice President of the ERISA Industry Committee, also provided written and oral

testimony to the Council. Ms. Jacobson described the results of a brief survey of the American

Benefits Council’s members. The survey results highlighted that the plan sponsors’ concerns

with voluntary transfers to state unclaimed property programs focused on the lack of uniformity

among state rules and state reporting requirements, that distributees may file claims for earnings

that may have been generated as a result of transfers to the state unclaimed property program,

and they indicated that they need guidance as to the steps to follow prior to transfers and as to

their ability to voluntarily transfer uncashed checks to state unclaimed property programs. ABC

felt it critical that ERISA’s broad preemption provisions be preserved and protected. Ms.

Robinson reviewed the challenges that plans have with monitoring, cancelling, and reissuing

checks with small dollar amounts when recipients fail to deposit them, and reviewed the steps

that plans take to best ensure the receipt of these payments, such as encouraging direct deposit of

payments in lieu of paper checks. She also stated that plans were concerned with potential

claims that the plan improperly transferred uncashed check amounts to state unclaimed property

programs because of ERISA’s preemption of state laws, and that clear, consistent, and

streamlined guidance from the Department would be integral to addressing these concerns and

help beneficiaries to find amounts that are due to them. Both witnesses said they would like to


29

see guidance that would be beneficial to both plan sponsors and beneficiaries such as allowing

plan sponsors to choose which state to use with notice to participants, or allowing voluntary

transfers to a central repository or federal agency.

Testimony heard from the plan sponsor representatives was uniform in its emphasis that the

Council’s report should be a platform for additional guidance from the Department and facilitate

plans’ ability to effectively administer its benefits programs and not the impetus for an

enforcement initiative. They emphasized that any guidance from the Department should

streamlines plans’ processes and administrative burdens, state what actions are needed to locate

missing participants prior to the state unclaimed property process, require states to have

uniformity in rules and reporting, and declare that a plan sponsor’s voluntary decision to transfer

uncashed distribution checks to state unclaimed property programs will not trigger additional

liability.

4. Consumer Representatives

The Council heard testimony from Jane Smith, Policy Analyst for the Pension Rights Center.

Ms. Smith expressed a preference for a federal agency to be designated as a repository of

uncashed checks. She proposed that the PBGC would be the logical choice. In her view, the

PBGC would be a central repository, afford ERISA fiduciary protections to the funds, protect the

tax-deferred accumulation of retirement accounts (enabling future tax-free rollovers to employer

or IRA accounts, avoiding several types of federal and state taxes and penalty taxes), preserve

beneficiary, insurance records and spousal and former spouse’s rights, provide interest on

account holdings, utilize a logical and searchable site for finding pension benefits, and ensure

lost retirement accounts will be held for the sole benefit of the participant into perpetuity. Ms.

Smith noted that other countries have such registries that both help locate Missing Participants

and help participants and beneficiaries locate their lost plans.

The Pension Rights Center also expressed skepticism that state unclaimed property programs are

a logical place for participants to look for their benefits, noting that there is not a clear process

for determining which state program may have the participants’ account. She also expressed

skepticism about the states’ reported return rates. She further expressed concern that the transfer

to state unclaimed property programs results in the loss of important ERISA protections and


30

noted that states generally do not credit interest on amounts attributable to uncashed checks. The

fact that there are 50 states with different rules and practices was also a concern.

Further, the Pension Rights Center indicated serious concern about participants not being

notified of where their benefit accounts are transferred and the resulting difficulty participants

have in locating and obtaining their ERISA benefits.21

Ms. Smith concluded that state unclaimed property programs are not the best arrangement for

ERISA benefits and that a far better approach would be a federal agency designated as a

repository for uncashed checks. In this regard, she recommended an expansion of the PBGC

program for Missing Participants such that employers terminating defined contribution plans be

required to transfer accounts for Missing Participants to the PBGC program, employers with

Missing Participants from active plans be required to list the names of persons missing after a

diligent search and be permitted to transfer such accounts to the PBGC program voluntarily,

employers making small balance distributions under $5,000 be required to report the name of the

Missing Participant and the location of their account balances to the PBGC, and she suggested

that the PBGC could be authorized to receive amounts of forced uncashed checks under $1,000

with the associated names placed in the searchable database.

5. Unclaimed Property Professionals

The Council also heard testimony from William Berger of Keane Unclaimed Property, which

provides unclaimed property communications, compliance and consulting services, and Jennifer

21 The Pension Rights Center testified that there is a lack of information reporting that participants can leverage to locate their missing retirement benefits. They may have no way to locate the IRA or state unclaimed property program to which their benefit may have been distributed. Moreover, with plan and business mergers, even amounts held within the plan may be difficult to locate and in the absence of any Social Security Administration reporting may be lost. The Council is not making recommendations on this set of issues because it is outside the scope of our charge but we note that the Department may want to consider whether information about the handling of uncashed distribution checks should be covered by the plan’s summary plan description to at least create a book of record that could be requested and consulted.


31

Borden, who testified on behalf of the Holders Coalition and the Unclaimed Property

Professionals Organization (“UPPO”).22

Mr. Berger indicated that unclaimed property programs are complicated, with no two states

having the same laws or reporting due dates. He indicated that there are four primary steps to

unclaimed property reporting and compliance and that there are complexities with each one:

analysis, due diligence, reporting and remittance. The analysis involves the what, when and

where things need to be reported, and maintaining the states’ administrative guidance, statutory

directives, and rules and regulations can be a formidable task. Due diligence requires notices

being sent to the last known address of the owner before funds can be transferred and those

notice requirements vary for timing, letter content, method of delivery, and even attestations of

the mailing. State reporting requirements have different reporting date requirements, electronic

formats for the submissions, and codes used for reporting of the property type. The remittance of

the property is typically by check or electronic funds transfer (“ETF”), and some states require

ETF, Fed wire, or ACH transfers. Reports must be delivered by the appropriate state deadline

and through the state specified electronic media with the required cover sheet. In addition, some

states’ unclaimed property laws require negative reporting if the holder has no unclaimed

property eligible for reporting in a particular year. Therefore, Mr. Berger emphasized that any

guidance from the Department addressing the voluntary transfer of uncashed checks should be

very clear as to the definition of uncashed checks, which states plan fiduciaries can use, if there

is a dollar threshold for these transfers and can these amounts be determined and changed by the

holder, what is the expected frequency of the transfer, and the expectation that the plan be

prepared to handle increased owner communications and check reissuance that will result from

the states’ required due diligence, and be prepared to monitor state legislation that alters

reporting requirements.

Ms. Borden on behalf of UPPO presented the results of its most recent survey of return rates for

state unclaimed property programs covering the years 2013-2017. The Coalition asked the states

to provide the total amount of property received and the total amount of claims paid for the five-

22 The Holders Coalition represents institutions whose members hold property. UPPO is a national trade association representing holders of unclaimed property and service providers. Its membership includes over 425 unclaimed property holders and service providers and 1,500 unclaimed property professionals.


32

year period 2013 – 2017. UPPO received data from all 50 states (and the District of Columbia)

for the five-year period, and produced an aggregate “return rate” for each of the 51 jurisdictions.

The resulting return rate—a percentage produced by dividing the amount of property returned to

the owners over a five-year period by the amount received by the state over that same period—is

a five-year average rate similar to the annual “owner return rate” calculated by the state

unclaimed property programs. The results ranged from a high of 95.34% to a low of 8.59%.

Three states – Indiana, Nebraska, and Wisconsin – had return rates exceeding 60%. The average

(not including the three states with the 60+% return rate) was 48%.

According to UPPO, better return rates are due to a number of factors. For example, states that

did “data matching” – checking the name of the owner, as reported by the holder of the property,

against state databases such as department of revenue (tax) records, drivers’ license/motor

vehicle records, or other records – had higher return rates than states that did no data matching.

(It is the Council’s understanding that, at present, only four states currently do data matching.)

Additionally, some states will publish more information about the property (name of owner, last

known address of owner, nature of the property, name of original holder, amount held by state),

whereas other states, due to privacy concerns, will publish less information. UPPO found a

positive correlation between the amount of information available to potential claimants/owners

regarding the property and a state’s owner return rate, without noticing an appreciable increase in

the rate of fraud. Differences in the claims process and, in particular, the amount of

documentation a state requires from the owner before paying on the claim also affected the

owner return rate (with greater levels of documentation negatively affecting return rates).

Finally, they found that whether a state permitted third-parties to file claims on behalf of owners

in return for a finder’s fee had an impact on the likelihood of reunification (with states permitting

such third-party work generally achieving higher owner return rates).

Ms. Borden also explained that other anomalies could account for lower return rates. For

example, if a state were to receive a lot of “owner unknown” property or amounts paid to it

based on estimates (which, by definition, does not include owner names), that would increase the

denominator and thus lower the return rate.


33

6. Recordkeepers

Representatives of two recordkeepers testified before the Council: Holly Tardif and Garrett

Hohimer from Alight Solutions and William Jeffries from Empower Retirement. Additionally,

Michael Hadley testified on behalf of the SPARK Institute, an association which represents

defined contribution recordkeepers and other groups. The approaches to dealing with uncashed

checks differed by recordkeepers as did their perspective on the potential benefits of using state

unclaimed property programs.

Recordkeepers service state and local governmental plans that are not subject to ERISA and

therefore are subject to mandatory compliance with state unclaimed property laws. The

recordkeepers indicated that they had developed infrastructures to facilitate transfers to state

unclaimed property programs. They also acknowledged that they had other lines of business,

e.g., IRAs, that are subject to state unclaimed property laws and that they routinely transfer

property to the state programs.

Two themes emerged from the testimony. First, the recordkeepers indicated that they offered

robust search services to help reunite missing participants with their retirement benefits and that

they generally were able to locate participants if they had basic information like a social security

number. They expressed doubt that state unclaimed programs would be able to improve upon

their efforts. Second, they expressed that plan sponsors would need a compliance roadmap for

dealing with missing or unresponsive participants. They did not think it was reasonable to have

plan fiduciaries monitor 50+ jurisdictions’ unclaimed property programs and that this burden

would result in plan costs that are not proportionate to the issue of uncashed distribution checks.

But in general, the recordkeepers expressed openness to the possible use of transfers to state

unclaimed property programs as a solution to the problem of uncashed checks of Missing

Participants.

7. Auto-IRA Providers

Representatives of three auto-IRA providers testified before the Council: Kevin Clark and John

Perugini from Millennium Trust Company; Peter and Spiro Preovolos from PenChecks; and

Spencer Williams from the Retirement Clearinghouse. These companies generally positioned


34

their services – rollovers to IRAs and transfers to taxable accounts – as private, market-based

solutions to the uncashed check problem. They indicated that their services help plans reduce

costs, administrative burdens and fiduciary liability by accepting transfers of small plan balances,

including those represented by uncashed checks, to IRAs or taxable savings accounts.

The auto-IRA providers generally noted that they engage in extensive efforts to reunite Missing

Participants with their retirement savings, including using commercial locator services and credit

reporting agencies. Retirement Clearinghouse described a new program it was developing that

would leverage data from defined contribution plan recordkeepers to take involuntary rollovers

and transfer them to the Missing Participant’s new employer’s plan.23 None of the providers,

however, provided data about the extent to which participants are reunited with their savings.

The providers indicated that, although transfers are generally invested in money market mutual

funds, IRA owners have the ability to invest their account balances in other funds and they earn

interest while invested in money market funds. The providers indicated that their fee structures

are designed to be reasonable but acknowledged that some account balances could be reduced or

even eliminated by fees.

There was differing testimony on the tax status of uncashed distribution checks that are

transferred to the providers. Some plans transfer amounts attributable to uncashed distribution

checks to taxable savings accounts that are invested in money market funds. PenChecks noted,

however, that it works with plans to restore previously withheld taxes and reverse tax reporting

and, therefore, preserve the tax preferred status of retirement savings. In this regard, PenChecks

indicated that tax consequences may be reversed within three years of a check distribution. Once

reversed, the balance may be rolled over into an IRA pursuant to the DOL safe harbor if the

amounts were under $5,000. PenChecks stated that the “functional process” to restore the

withheld taxes was “merely nothing more than a true-up recordkeeping entry on the current tax

reporting of a custodian that regularly withholds and remits taxes.”

Millennium suggested that part of the problem with uncashed checks, many of which consist of

balances under $1,000, could be resolved if plan sponsors amended their plans so that smaller

23 Prohibited Transaction Exemption (PTE) 2019-02, 84 Fed. Reg. 37337 (July 31, 2019).

https://www.federalregister.gov/documents/2019/07/31


35

balances were deposited in rollover IRAs unless the participant affirmatively elected to receive

the distribution in cash.

8. Representative of the PBGC

Stephanie Cibinic, Deputy Assistant General Counsel of Regulatory Affairs in the Office of the

General Counsel at the PBGC, provided two perspectives: the perspective of an administrator of

a central repository for uncashed distribution checks and the perspective of a plan administrator.

Ms. Cibinic noted that official PBGC guidance is issued in writing and her comments were her

own and not that of the PBGC.

Ms. Cibinic noted that the PBGC maintains a Missing Participants Program which was expanded

in 2018 from defined benefit plans to also cover terminated defined contribution plans. The

purpose of the expanded Program is to connect plan participants with benefits due if the

participant is missing when their retirement plans are terminated. The PBGC holds the benefits

for Missing Participants and beneficiaries in a trust account separate from other programs of the

PBGC and assists participants in finding and receiving retirement plan benefits. Since the

expansion, the defined contribution segment of the Program has received benefit amounts or

information identifying where benefits are held covering about 52 defined contribution plans on

behalf of 1,100 Missing Participants with assets that total approximately $18 million. The

majority of those filings and transfers occurred in a little over the first seven months of 2019 as

reported on August 29, 2019 to the Council.

There is no fee for transferring Missing Participant benefit amounts if the amount is $250 or less.

The Program accepts Missing Participant benefits regardless of how small. Benefits are held in

perpetuity until the participant or their beneficiaries are found and interest is credited to the

transferred benefit amounts at the federal midterm rate in accordance with the statute. The

PBGC searches for Missing Participants initially and then periodically thereafter without regard

to the size of the benefit. Found participants can continue to grow their retirement savings tax-

free by receiving their benefits as rollovers into qualified retirement plans or an IRA. The PBGC

website also contains a centralized unclaimed retirement benefits registry where a terminated

plan participant may search for their benefits by name or by plan.


36

Separately, from the perspective of a plan administrator, Ms. Cibinic noted that the PBGC has a

well-defined policy and procedures for routine monitoring of reports on outstanding checks of 90

days and stale dated checks that remain uncashed for 180 or more days. They compare uncashed

checks to the Social Security Administration’s Death Master File to determine if a participant has

died. If no record of death is listed they attempt to obtain a death certificate. On death when a

participant’s benefit provides for survivor or beneficiary benefits, they search for the beneficiary

and when found reissue benefit checks due. If a Missing Participant is not deceased and the

search for a new address is successful, the PBGC determines if the check is stale dated and if so

reissues the benefit amount with earnings credited back to the date of the original check. If the

Missing Participant cannot be located, or when located the Missing Participant does not cash the

check, the benefit amount due the Missing Participant remains is a trust account with the PBGC

in perpetuity unless claimed by the participant or beneficiaries.

Ms. Cibinic stated that the PBGC does not have statutory authority to accept uncashed

distribution checks of Missing Participants in active plans; it is limited by statute to Missing

Participants in terminated defined benefit and defined contribution plans.24

VII. COUNCIL OBSERVATIONS

1. Tax Considerations

In Field Assistance Bulletin 2014-01, the Department expressed a preference for IRA rollovers in

the context of Missing Participants in terminating defined contribution plans. In fact, the

Department went so far as to state that other options, including transfer to a state unclaimed

property program, should only be considered if there is “some other compelling reason based on

the particular facts and circumstances.” The Department’s preference for rollovers in the context

of terminating plans is based on “the potential considerable adverse tax consequences to the plan

participant” of a transfer to a state unclaimed property program (or other non-tax-favored

24 The Council understands that a plan may indirectly effect a transfer of uncashed distribution checks of Missing Participants in an active plan to the PBGC through a spin-off and termination transaction, in which the portion of the plan attributable to Missing Participants is spun-off into a separate plan and then terminated. Taken to its logical extreme and ignoring transaction costs, such an approach might support transfers on individual Missing Participants in active plans to the PBGC. The Council did not actively consider this notion because it views it as outside the scope of the Report.


37

repository, such as a bank account). Those adverse tax consequences can include “[immediate]

income taxation, mandatory income-tax withholding[,] and a possible additional tax for

premature distributions.” Implicit in this analysis is the view that a transfer from a plan to a state

unclaimed property program is a taxable distribution and we assume for purposes of our report

that such transfers are in fact taxable distributions.25

Significantly, however, all of the options for addressing the uncashed check problem appear to

start from the premise that the participant has been taxed on the value of the check,

notwithstanding that the check has not been cashed. As a practical matter, plans generally

impose income tax withholding on distributions to participants. That is, income tax withholding

is triggered by issuance of the check. While the Council heard testimony to the effect that it is

possible to reverse income tax withholding and that some plans indeed have a practice of

effectively unwinding taxation for uncashed checks in certain circumstances, this does not

appear to be a widespread practice. Instead, Missing Participants who receive uncashed checks

appear ordinarily to be subject to income tax consequences at the time of the issuance of the plan

check. Moreover, very recent IRS guidance may call into question whether a reversal of tax

reporting and withholding on checks sent to Missing Participants is always appropriate by

holding that the distribution of a check to a participant is a taxable distribution, thereby

triggering income taxation, mandatory withholding and a possible additional tax for premature

distributions, even if the check was never cashed.26

Thus, the issue before the Council – uncashed checks of Missing Participants – starts from the

premise that, unless the check was returned to the plan and the income tax withholding was

reversed, the participant has already been subject to the tax consequences associated with a

distribution from the plan. The resulting question is, therefore, what to do with the after-tax

25 The Internal Revenue Service has never directly addressed whether a payment from a plan to a state unclaimed property program is a taxable distribution subject to federal income tax. However, the Department’s understanding of the tax law as reflected in Field Assistance Bulletin 2014-01 is consistent with analogous subsequent IRS guidance. See Revenue Ruling 2018-17 (treating a payment from an IRA to a state unclaimed property program as a taxable distribution); see also GAO 19-88 (including letter from the IRS stating that they provided input to DOL on this aspect of Field Assistance Bulletin 2014-01). 26 See Revenue Ruling 2019-19. The guidance does not, however, address whether a check sent to a participant who never receives the check, for example, because it is sent to a stale address, has had a taxable event. The ruling merely indicates that a participant cannot turn their back on income by choosing not to cash a check. The Council believes it would be helpful if the IRS were to issue clarifying guidance around the treatment of uncashed checks paid to Missing Participants.


38

proceeds associated with the uncashed check. For these reasons, the Council does not view the

preference for rollovers reflected in Field Assistance Bulletin 2014-01 as apposite to the issue at

hand and generally regards the tax implications of a transfer to a state unclaimed property

program as largely the same as those applicable to an involuntary cash-out of amounts

attributable to a previously distributed check or even the use by a plan of forfeiture-and-

reinstatement under Treasury Regulation 1.411(a)-4(b)(6). In each case, the participant has

already been subjected to income taxation on the uncashed distribution check amount.

2. Likelihood of Reuniting Missing Participants with Lost Retirement Savings

Testimony reflected that plan sponsors and IRA providers routinely use appropriate methods to

locate Missing Participants (generally those listed in Field Assistance Bulletin 2014-01),

including steps that involve greater costs such as the use of fee-based internet search tools,

commercial locator services, and credit reporting agencies. However, once these methods of

outreach have been exhausted and a participant is identified as missing, the ongoing use of the

same search approaches are unlikely to be materially successful.

Moreover, even for Missing Participants who subsequently remember an unpaid benefit, it can

be difficult to locate that benefit. It may have been paid to an IRA provider but the participant

may not have any connection to, or information about, the IRA provider. Similarly, there are

few searchable databases for IRA providers and we understand that plan recordkeepers typically

do not include information about IRA providers in connection with plan recordkeeping changes,

which means that a plan’s recordkeeper may not be able to tell the participant where their benefit

went even if the participant is able to locate their recordkeeper. And often the names of plan

sponsors and plans change through mergers or other consolidations so that participants may have

trouble locating their former plan at all.

Taken as a whole, the Council observed that amounts attributable to uncashed distribution checks

of participants who have not been located through conventional search methods are unlikely to

be reunited with the beneficiary. In this regard, witnesses representing plan recordkeepers and

IRA providers did not offer up data or other information on the extent to which Missing

Participants are ever reunited with their retirement savings but generally conceded that the odds

were low. This raises the specter that the use of mandatory distributions to IRAs or taxable


39

accounts merely defers transfers to state unclaimed property programs after the imposition of

what may be substantial IRA fees for little if any economic benefit. Similarly, it suggests that

forfeiture-and-reinstatement may be largely forfeiture.

In contrast, state unclaimed property programs have a number of features that may increase the

likelihood that Missing Participants will be reunited with their lost retirement savings.

According to the states that testified, ongoing outreach efforts to return unclaimed property to

owners vary among the states based on what each state found to be most effective for their

demographics. Outreach efforts may involve a combination of methods, e.g., booths at state

fairs, billboard advertising, radio and television advertising, that is not duplicative of the

conventional search methods utilized by plans.

Moreover, a few states have embraced search methods that are simply not available to the private

sector. These search methods generally involve leveraging data bases, such as state tax records

or Department of Motor Vehicle records, and materially raise the chances of reuniting Missing

Participants with their retirement savings. Notably, the states testifying offered evidence that

these search efforts yielded material recoveries above-and-beyond conventional search methods

typically used by plan fiduciaries. States using these methods were reported to have 2013 to

2017 return rates that ranged from 65% to 95% compared to states that do not use these methods,

who were reported to have return rates of 8.59% to 58.75%.

Additionally, participating states provide an online, searchable database of unclaimed property,

MissingMoney.com. For states that do not participate in the MissingMoney.com database, the

site provides a link to the unclaimed property site of each state.

Thus, the Council views transfers to state unclaimed property programs as providing a greater

likelihood of reuniting Missing Participants with their retirement savings than other available

approaches.

3. Operational Complexity with Transfers to State Unclaimed Property Programs

One of the primary concerns of the plan community is the administrative complexity of

transferring amounts attributable to uncashed checks to 50 different states as well as the

territories. The state witnesses generally took the position that a plan could not transfer all


40

uncashed checks to the state in which the plan administrator or the plan trust is domiciled.

Instead, their view is that even in a voluntary transfer regime the appropriate state to receive

amounts attributable to uncashed checks is the state of the participant’s last known address.

This view has some logic in that a Missing Participant is unlikely to know where the plan’s trust

is located but will know where he or she has lived. However, for plans with participants who

reside in multiple or even all 50 states, it potentially raises significant complexity for plans.

As a threshold matter, transfers of uncashed checks to multiple states involves the inherent

complexity associated with sending money to multiple locations and using different file feeds.

Also, states generally have different approaches as to when a holder of property should treat

property as abandoned, referred to as the dormancy or abandonment period. The dormancy

period among states generally ranges from 3 to 5 years. The states also have different owner-

notification requirements such as content of letters, time period when letters may be sent, and

manner of sending. The deadlines for holders to report and remit unclaimed property to the

states also varies. Plans expressed concern about having to age uncashed checks of Missing

Participants for various periods, having to comply with differing notification regimes, and

meeting different deadlines for reporting and remitting funds to the states. Others pointed out

that the greatest likelihood of reuniting Missing Participants with their lost retirement benefits is

a search for the participant closest in time to the original issue date of the check. The longer a

Missing Participant goes without finding his or her retirement benefits, the less likely they are to

ever be reunited, which suggests that these abandonment periods may be at odds with the

Department’s purpose of reuniting participants with their lost retirement benefits.

The state witnesses made a number of points in response to concerns about complexity and

timing considerations. First, they shared that every state works with large holders of lost

property on early or “off-cycle” transfers. They shared that these off-cycle transfers generally

forgo state required dormancy periods, provided that the holder has made reasonable, good-faith

efforts to locate the owner of the property. Further, the state witnesses shared that this would

ordinarily be the case for ERISA plans given the fiduciary obligation to locate Missing

Participants. Second, the state witnesses pointed out that many employers, recordkeepers and

other plan service providers are familiar with state unclaimed property programs since other

types of property held by employers are subject to state unclaimed property laws. In this regard,


41

many recordkeepers service non-ERISA plans, such as state and local retirement plans, that are

subject to state unclaimed property law. For this reason, recordkeepers may already have

extensive experience with transfers to the state unclaimed property programs of many states.

Third, the states emphasized that there is considerable uniformity among the states requirements

concerning transfers of unclaimed property, largely as a result of the adoption of model

unclaimed property laws.

The Council is keenly aware of the administrative complexities associated with state unclaimed

property programs; however, the Council has kept in mind that the issue at hand is not a mandate

for plans to transfer unclaimed property to the states but rather an option that a plan administrator

may voluntarily choose to utilize. The Council anticipates that the states, which seem desirous

of receiving unclaimed property from ERISA plans and then attempting to return the property to

property owners, will readily agree to early and off-cycle transfers of uncashed checks from

ERISA-governed plans.

With early and off-cycle reporting, different state dormancy periods, notice requirements and

filing deadlines should not be a material barrier to utilization. In this regard, it should be readily

apparent that the prudent fiduciary efforts of plan administrators to locate Missing Participants

are more than sufficient to satisfy state concerns that they not receive property unless there has

been a reasonable good-faith effort to first find the property owner. Similarly, we would expect

that plans and their recordkeepers with material experience working with state unclaimed

property programs will be more likely to elect to transfer uncashed checks of Missing

Participants to states. The Council also believes that the states are sufficiently incentivized to

work with plan fiduciaries and their representatives to establish workable and consistent

protocols. To the extent the states prove unreasonable, plans will be in a position to simply

forego transfers of uncashed checks for Missing Participants to state unclaimed property

programs.

4. Differences Among States

One critical issue is the extent to which there are material differences among the states that a

plan fiduciary should consider in deciding whether to transfer assets attributable to uncashed

checks to state unclaimed property programs. To the extent there are material differences, it


42

could suggest that plan fiduciaries have an obligation to review each state unclaimed property

program, which would be a daunting and potentially cost prohibitive task.

In general, the Council observed that there are certain core features of state unclaimed property

programs that are common across their programs. State unclaimed property programs are

maintained for the purpose of safeguarding and reuniting owners with missing property and,

except for two states, they serve as perpetual custodians of the funds, with use of the money to

finance their operations until it is reunited with their owners, but never become legal owners.

There is variation in the approaches that each state takes to satisfy its fiduciary obligation. For

example, some states may have substantially larger advertising budgets while other states may

rely more on lower tech solutions, such as a booth at the state fair. Larger states may have larger

staff. The Council believes, however, that these differences are in many situations appropriate

based on differences in population, demographics and the particular character of a state.

The Council also does not believe that it makes sense to specify a minimum return rate or that it

is reasonable to expect plan fiduciaries to review return rates for each of the states. As discussed

above, there is some material variation in the return rates of each of the states. However, some

of the variation appears to be attributable to the characteristics of the states. For example,

Delaware logically has a lower return rate than other states because it is often the default

recipient of unclaimed corporate property for which the holder has no owner address or where

the last known address of the owner is outside the United States. In those situations, established

case law provides that the state of incorporation of the holder governs. Approximately half of all

public companies and 66% of the Fortune 500 have elected to incorporate in Delaware due to the

ease of resolving disputes and under certain conditions favorable state corporate income tax

laws. This leads to Delaware having a disproportionate volume of unclaimed property and

logically a lower return rate relative to other states. The Council did not hear witness testimony

or have access to data that definitively explained the variations in return rates among the other

states, but it may be that return rates can be expected to be different for states with larger or

smaller urban populations or other regional and local characteristics.


43

Moreover, the Council is aware that state unclaimed property programs are rapidly evolving. It

is clear, for example, that the advent of the internet has been transformative in improving

return rates and it would not make sense to set mechanical requirements.

The Council appreciates the approach suggested by NAUPA for the establishment of minimum

standards for state programs and thinks that it could be a practical way of ensuring that the

benefits of Missing Participants are transferred to states that have sound practices in place for

reuniting Missing Participants with their retirement benefits. Moreover, the Council believes

that such a minimum standards list could spur state programs to align their practices; for

example, the two states that do not provide claims in perpetuity might be motivated to change

their practices.

It is, however, not a simple exercise to define the required minimum standards. It was clear

from the testimony that states utilizing other state records to locate Missing Participants have a

materially higher return rate than the states that do not. For example, Wisconsin is one of the

first states to use state tax records to search for and pay out unclaimed property of state

residents. Wisconsin has a return rate in excess of 60%. The Council generally believes that all

states should utilize other state records to the extent possible. The materially higher return rates

suggest that a best practice should be use of other state records. However, it is very difficult to

articulate a data matching standard. For example, there are states that do not have income taxes

at all and while other options like utilization of DMV records might offer an alternative, the

Council is simply not familiar enough with the alternatives and considerations to confidently

assert that data matching with other state records should be a requirement. While it makes

sense to encourage the growth of best practices, it will be very difficult for plans to transfer

uncashed distribution checks to the states if not every state meets these minimum standards.

Another consideration is the extent to which the states credit interest on amounts attributable to

uncashed benefit checks. Only Massachusetts, Michigan, New Jersey and Ohio credit interest on

all unclaimed property held by the state. A few Council members were troubled by this failure to

credit interest, viewing the absence of a time-value of money adjustment as indicative of a

forfeiture. Other members of the Council were not troubled by the failure to credit interest

because the other available options do not appear to effectively credit interest. A plan that


44

utilizes forfeiture-and-reinstatement is merely obligated to provide a re-appearing participant

with the amount forfeited. There is no required adjustment for the time-value of money. And

the Council generally understands that IRA providers typically charge ongoing fees that may

exceed the interest credit on average amounts attributable to uncashed checks. These amounts

are by law invested in capital preservation vehicles like money market funds and the low average

balances typically mean that hard dollar IRA fees, e.g., a $35 annual fee, are more than enough

to effectively eliminate any time-value-of-money adjustment and have the potential to deplete

small balances in their entirety. But there is an argument that the crediting of interest should be

considered a requirement.

There are other possible considerations, for example, some plans may not be willing to transfer

uncashed checks to state unclaimed property programs if a state may assert that such use causes

the plan to have a nexus with the state. This might suggest requiring states to waive any

argument for nexus based on use of state unclaimed property programs. Other considerations

could involve notifying plans when participants are located so that future checks could be sent to

the right address. But taken as a whole, while the Council views a minimum standards list as a

logical approach to mitigating the burden of fiduciary reviews of 50+ jurisdictions, the Council is

not comfortable based on the record with specifying such a list.

5. Potential Backlog of Uncashed Checks

As mentioned above, the states highlighted that there may be substantial amounts attributable to

uncashed checks of participants who went missing many years ago. The concern is that plans

should not have to conduct costly searches for these participants given the very low probability

of success and that such costs would deter plans from addressing the Missing Participant

problem. The Council is sympathetic to the issue identified by the states but has chosen not to

make a recommendation as it is outside the scope of this report.

VIII. REASONS FOR RECOMMENDATIONS

1. Uncashed Checks as Plan Assets

The 2019 Council recommends guidance clarifying that uncashed distribution checks attributable

to Missing Participants are assets of the plan within the meaning of section 3(42) of ERISA and


45

the Department’s regulations thereunder and, therefore, that plan administrators have fiduciary

responsibilities with respect to such assets. Based on testimony, the Council believes that some

plans may be leaving assets attributable to uncashed checks in the plan’s or recordkeeper’s

disbursement account and may not be taking steps to locate participants with outstanding checks.

Amounts attributable to these checks may sit indefinitely in the disbursement account. These

assets are unlikely to be reunited with Missing Participants and are not benefiting the plan. The

Council believes that this may be occurring in no small part because there is a lack of guidance

about whether uncashed checks are assets of the plan with the fiduciary obligations that

accompany plan asset status. The Council believes that guidance clarifying that uncashed checks

are plan assets would encourage plan fiduciaries to act prudently with respect to such uncashed

checks and would also clarify that state unclaimed property laws are preempted by ERISA with

respect to such uncashed checks.27

There is no guidance addressing whether uncashed checks are plan assets. The plan asset

regulations do not directly address the issue.28 It is natural that plan fiduciaries would be

uncertain about the status of uncashed checks because the IRS generally treats the uncashed

checks as having been paid in a taxable distribution to the participants. Moreover, uncashed

checks usually are not reflected in the plan’s trust or other financial reports. However, the

Department has indicated that in situations outside the scope of the plan assets regulations

(generally applying to participant contributions and investments), ordinary notions of property

rights under non-ERISA law should be applied to identify plan assets. The process includes

consideration of any contracts, plan documents or other legal instruments.

The Council understands that a check is generally a document evidencing a claim by the payee

against the payor created by the maker to satisfy an obligation of the maker to the payee. The

payor receives money of the maker to satisfy the payee’s claim and discharge the maker’s

obligation. Cashing the check satisfies the payee’s claim against the payor and the maker’s

obligation to the payee. The maker, however, has the contractual right to recover the amounts

27 See GAO 19-88 (identifying as an issue whether ERISA preemption applies to uncashed distribution checks). 28 DOL Reg. §§ 2510.3-101 and -102.


46

transferred to the payor if the check becomes void or is otherwise cancelled. In our view, this

strongly supports the conclusion that an uncashed check is a plan asset.29

The notion that an uncashed check is a plan asset is clearly reflected in the manner in which

plans currently proactively handle uncashed checks. The underlying assets attributable to an

uncashed check unquestioningly are plan assets when the assets are transferred back to the plan

for disposition through involuntary rollover to an IRA or forfeiture-and-reinstatement. It makes

little sense if there is no corresponding plan asset during the intervening period in which a check

is outstanding.

2. Remittance of Uncashed Checks to a State as a Distribution of Benefits

The Council also recommends that the Department issue guidance stating that a transfer of

amounts attributable to uncashed checks to a state unclaimed property program is a payment of

benefits within the meaning of sections 403(c) and 404(a) of ERISA and, as a result, that such

amounts cease to be plan assets and that the plan’s obligation with respect to the participant has

been satisfied to the extent of such transfer.

As reflected above, in the absence of guidance, it is not entirely clear that plan administrators

may permissibly transfer uncashed check amounts to a state unclaimed property program

consistent with their fiduciary obligations to use plan assets exclusively to pay plan expenses or

plan benefits. The Council believes that it would be helpful to clarify that a transfer of amounts

attributable to an uncashed check is a payment of benefits and, as a result, the plan’s obligation

with respect to the participant has been satisfied to the extent of the transfer.

29 The question of whether the underlying dollars in a plan disbursement account are plan assets has been a source of controversy and confusion. See In re: Fidelity ERISA Float Litigation, 829 F.3d 55, 60-62 (1st Cir. 2016) (holding that amounts held in an omnibus plan disbursement account are not plan assets but reserving on whether the same would be true if a plan had an unconditional right to receive repayment); Brief of The Secretary of Labor as Amicus Curiae Supporting Plaintiffs-Appellants, In re: Fidelity Float Litigation (reserving on whether amounts held in a plan disbursement account are plan assets); see also Field Assistance Bulletin 2002-03 (treating float on amounts held in plan disbursement accounts as compensation but not addressing the plan asset question); Letter from Robert Doyle to Judith A. McCormick (Aug. 11, 1994); Advisory Opinion 93-24A (Sept. 13, 1993). We did not hear testimony on, and are not addressing, whether the plan’s asset is the plan’s contractual right to repayment or the underlying dollars held in the plan disbursement account. However, the Council’s recommendation is not meant to disrupt existing structures and practices by which retirement plans effect distributions. We are not, for example, suggesting that amounts attributable to uncashed checks that are held in a plan or omnibus disbursement account must be held in trust, set aside from other assets held in the disbursement account or included on the Form 5500.


47

3. Voluntary Transfers as Consistent with ERISA Fiduciary Duties

The Council also recommends that the Department issue guidance confirming that a plan may

elect to voluntarily transfer amounts attributable to uncashed checks to a state unclaimed

property program.

Although the Department has previously indicated that voluntary transfers to state unclaimed

property programs are permitted, the Department indicated that it was not a “preferred” option.

More generally, there remains confusion about the interplay between preemption and voluntary

transfers to state unclaimed property programs with testimony reflecting that plan administrators

are surprised that such transfers are permitted. The Council believes that transfers to state

unclaimed property programs have an improved chance of helping to reunite Missing

Participants with their retirement savings.

The Council does not believe that any of the options that are available to plans should be viewed

as “preferred”; instead, we believe that each option has a potential role to play in addressing the

problem of uncashed distribution checks. In other words, the Council is of the view that

voluntary transfers are in the nature of an “additional tool in the toolbox” that plan administrators

have available for addressing the problem of uncashed checks owed to Missing Participants.

Similarly, the Council believes that a plan is free to determine for itself the extent to which it will

engage in voluntary transfers of uncashed checks to state unclaimed property programs. Plan

administrators are in the best position to assess what makes the most sense for their own plans.

Some plans might determine, for example, that adopting an ongoing program of voluntary

transfers involves too much administrative complexity or cost but believes that a special, one-

time, transfer to tackle a backlog of uncashed checks (e.g., uncashed check reflecting amounts

owed to participants who, despite the plan’s reasonable efforts to locate them, have been missing

for more than x years) would be in the best interest of the plan and its participants and

beneficiaries. Another plan might determine that, given its plan demographics and balancing the

cost and benefit of a voluntary process, a process of annual voluntary transfers to state unclaimed

property programs makes sense but decides to limit its program to a single state (or a few states)

where it has a significant number of Missing Participants. Finally, a plan administrator might

decide, again balancing costs and benefits to the plan and its participants and beneficiaries, to


48

adopt a program of voluntary transfers for checks below a particular threshold (e.g., $100) or for

checks of a certain type (e.g., required minimum distributions) while continuing to employ other

processes for larger amounts or other types of payments. This type of flexibility, rather than an

“all or nothing” approach, will, the Council believes, make it more likely that plans will consider

voluntary transfers to state unclaimed property programs as part of an overall solution to the

problem of uncashed checks.

4. Safe harbor

We recommend that the Department issue guidance stating that a plan fiduciary shall not be

treated as failing to satisfy the duty of prudence to the extent assets are transferred to a state

unclaimed property program that meets minimum standard requirements.

The burden of conducting a fiduciary due diligence review of each of the 50 states and the

territories is not insignificant. The Council believes that plans will be reluctant to voluntarily

transfer uncashed benefit checks to state unclaimed property programs in the absence of some

simplification and that it is appropriate for the Department to alleviate this burden by specifying

minimum standards.

We have not, however, developed a specific list of requirements. The Council believes that

NAUPA’s list of minimum standards offers a helpful starting point but that further work needs to

be done to explore whether other elements should be required, such as data matching with state

records and interest crediting.

Finally, we believe that a plan fiduciary should be able to rely on a state’s representations or

certification that the state has met the to-be-determined minimum standards. A plan should not

have to evaluate each state’s compliance with the criteria. This is an area in which plans

generally do not have expertise and, as importantly, in which the cost of the due diligence to the

plan will quite possibly exceed the value of the due diligence. Put simply, the dollar amounts per

participant and per plan are largely modest in size, even if the cumulative amount at issue is

significant and the value to the individual may be material. In such a setting, it is important that

plans have an administratively feasible and cost-effective means of ascertaining whether to

voluntarily transfer assets to a particular state’s unclaimed property program.

report to the honorable eugene scalia, united states ... · benefit plans. this report examines...

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